New leaders may help China to boost growth

THREE ghosts have haunted the global economy in 2012: the Eurozone crisis; the looming US fiscal cliff; and decelerating growth in China’s economy. But as worries over China lessen, traders will be relieved that one of these ghosts may soon be exorcised.

After the speed of GDP growth began to decline towards the end of 2011, the question was whether China would face a “hard landing”. Recent data seems to dispel that notion. Mark Ingram of BGC Partners says “macroeconomic data suggests that China is engineering a soft-landing”. Last week’s manufacturing purchasing managers’ index (PMI) – a leading indicator – is at an eight-month high, rising to 49.5 from 47.9 in September. Crucially, new orders grew for the first time in a year. Non-manufacturing PMI also picked up, rising to 55.5 from 53.7. Add increased momentum in industrial production, expanding at its fastest rate in four months; and retail sales, growing at the fastest rate since April, and a bullish case emerges.

Bears point to a fall in employment and annual GDP which, at 7.4 per cent, has slowed to its weakest pace since 2009. However, the government’s target for 2012 growth is 7.5 per cent, and this is easily within reach. Loose monetary and fiscal policy will also support growth in the medium-term.

Traders will be closely watching upcoming data, released on Friday, to see whether it gives credence to the bullish case. Attention will also be on Thursday’s National Party Congress, when China’s new generation of leaders will be presented (although exact positions may be announced on 15 November).

Incoming central committees have historically bolstered economic growth by splurging on investment spending. But given the excess capacity in China’s private sector, the new cohort may not be gung-ho: many regions have already announced ambitious investment programmes on the back of a £100bn infrastructure stimulus programme. This could contribute to a boost in domestic demand and ease unemployment.

Given well-publicised bickering in the run up to the Congress, one question lingers over the ability of China’s leaders to push through much-needed economic reform. The economy relies on investment and exports, and desperately needs rebalancing. Enhanced domestic consumption and an expansion of its services sector could offset weak export demand.

Martha Wang of Fidelity thinks that the leadership change will “remove the political shackles” holding back markets. Companies with strong fundamentals that have been “indiscriminately punished by political uncertainty” will benefit. She cites the Nasdaq-listed search engine Baidu as an example. Companies like Diageo and Michael Page are also listed outside of China and positioned well.

Ingram believes that “areas which are geared into China’s growing middle class,” like healthcare, travel and the entertainment sector, are worth a look. He points out that there have been strong fund flows into China from exchange traded funds, which may appeal to some traders.

A potential risk is if Mitt Romney were to win today’s US presidential election, after he declared that he would label China a currency manipulator. Ingram says that “it could open the doors to a trade war” and may result in tariffs being imposed on China, hitting exporters and growth. Also, the Eurozone crisis and US fiscal cliff have potentially global ramifications, and could throw a spanner in the works.

Although China’s growth has slowed, it is still enough to make most nations envious. It certainly has the potential to resume its role as the engine for world growth. A rejuvenated China would improve confidence and help to reduce global risk. Come the end of the week, traders could be saying: “one down, two to go.”